Holistic view of energy

27 April 2012

New research predicts that energy prices will continue to rise and could be expected to increase by as much as 81% in the next ten years. Mark Callaway looks at the research highlights and believes facilities managers need to act now to bring about a significant change in boardroom attitudes to deal with the damage that this inexorable rise could bring.

Senior management in UK businesses are tackling significant rises in energy prices, with official figures showing an increase in spend on electricity and gas for commerce and the public sector from £5.8 billion in 2004 to £10.3 billion last year. The rise followed a long period of deceptively low energy costs stimulated by competitive markets and plentiful supplies. This coincided with an escalating increase in fossil fuel prices since 2004 which has been further compounded by the costs associated with the Government’s environmental policies in subsequent years.

The research, conducted by Power Efficiency, indicates that there will be no let-up in the decade ahead. Working with the independent market analysts, Waters Wye Associates (WWA), the research team projected business energy costs in 2021 based on known and expected measures. They took a ‘bottom up’ approach to forecasting a Central Case for electricity and gas bills for typical commercial premises.

The outcome indicates that volatile international energy markets will continue to put upwards pressure on bills, but UK companies will also face substantial increases as a result of Government policies to cut emissions and improve energy supply security, albeit driven by the best of motives. The key conclusion of the research, based on the energy consumption of a typical commercial customer, was that we could expect energy prices to rise by as much as 81% - an additional £8.4 billion per annum- by 2021, unless operators take remedial action.

In the UK we now import nearly half our gas, which means we are exposed to volatile international energy markets, and we use the fuel we import to generate half our national power. Additionally, the Government’s low carbon measures will result in higher bills as infrastructure changes are made. The Government’s Electricity Market Reform White Paper reflects its desire to make energy more affordable compared with the current market regime which nuclear companies say they won’t invest in. It will reinforce the trend to tax energy use and make customers pay for an increasing number of subsidies offered to investors in low carbon energy sources.

All of this presents an energy dilemma for facilities managers. It will cost businesses time and money to reduce energy consumption against a backdrop of rising energy prices. So, how can facilities managers implement a strategy to deal with the issue that will find favour in the boardroom?

There are plenty of opportunities for savings and there are financing deals available for funding energy efficiency projects. Accessing and approving these deals, however, requires the approval of both the MD and the FD, so they will need to be presented in the boardroom, preferably near the top of the agenda.

We recommend the key issues for discussion are as follows:

Dealing with energy price inflation

Energy prices will continue to inflate. The question is how this will impact the business? We predict that a typical large commercial office consuming around 1m kWh of electricity per annum will pay about £147,000 in 2021, compared with £78,000 in 2010. Previously, an office-based business may have viewed energy as a fixed cost, running at a low percentage of turnover. The strategy for change needs to reflect that the cost of energy will become an ever increasing percentage of turnover by 2021.

The cost of compliance

Carbon reduction guidelines are not just ‘greenwash’. Initiatives like the CRC Energy Efficiency scheme have real teeth, and facilities managers must impress upon company directors at major energy users that fines, enforcement notices, reputational damage, even criminal investigations will result from non-compliance. It is clear that calculating the cost of carbon compliance and setting the appropriate investment levels to achieve it are a top priority.

Making the right energy procurement decisions

Fixed price contract or flexible option? The former is a platform for planning in the short to medium-term, but with price fluctuations in energy supply moving by as much as 40% in a year, real savings can be made with flexible price contracts. Understanding how to get the best procurement deal is critical to a successful energy management strategy.

Identifying the project implementation requirements

Implementing energy efficiency changes requires expert management of the assets, the energy contracts and a good understanding of the business. Good project implementation will ensure an efficient use of building assets and regimes and ensuring these systems are well controlled will provide protection in the future. Our experience shows that establishing and managing energy improvement can trigger a review of the facilities management KPIs and asset management routines, which can result in a more effective use of staff and contractors.

The operations and maintenance ramifications

High quality, on-going maintenance of heating, air-conditioning, ventilation and lighting is critical to cutting consumption, costs and carbon output. It reduces wastage, improves performance and maximises reliability.

Monitoring and measuring

Cost and carbon reduction targets require on-going vigilance, triggering remedial action if progress falters. Facilities managers can establish energy monitoring and benchmarking systems that will provide an essential management resource for meeting targets. Don’t waste money on electricity that you don’t need. Using Power Factor Correction can reduce demand on electricity actually coming in from the distributor.

Imaginative use of energy

The CRC Energy Efficiency scheme whilst being a challenge is also an opportunity. There are benefits in terms of focusing on how energy is used in a building and taking action to ensure it is not wasted. This will result in cost savings and a reduction in carbon emissions and ultimately enhance an organisation’s reputation.

Outsource and risk transfer

Businesses can look at more radical and creative options to managing energy. One of the most recent options is via an Energy Service Company (ESCO), a business that develops, installs and finances projects designed to improve energy efficiency, often featuring renewable and low carbon energy sources. This effectively outsources energy management and transfers the risk of guaranteeing savings to the ESCO. It delivers an integrated energy procurement solution including finance, supply, compliance and project management.

Our advice is to take a holistic view of the energy issue. This will help facilities managers to develop and implement an effective energy management strategy to improve efficiency, reduce costs and cut carbon emissions. This is not about ticking a green agenda box, but addressing all the issues simultaneously for the long-term sustainability of the business.

Mark Callaway is the Energy Markets Director at Power Efficiency